After working hard to build up your wealth, you might feel it’s time to give something back. And one of the best ways to do that is through a charitable trust. Here’s what you need to know about this estate planning strategy and how it can benefit you, your loved ones, and the charities you care about.
What Is a Charitable Trust?
Charitable trusts hold and manage assets for philanthropic purposes. They’re a popular estate planning strategy because they allow you to give back to your favorite charitable organizations while benefiting your beneficiaries (and yourself) at the same time.
There are two main charitable trusts: charitable remainder and charitable lead trusts. Each can help you lower your taxes and safeguard your assets, but it’s important to know which best aligns with your financial and charitable goals.
Charitable remainder trust (CRT): A CRT is an irrevocable, income-producing charitable trust. The donor transfers their assets into the trust, which may be eligible for partial income tax deductions. The trust then generates income for the beneficiaries. These payments continue over a specific period, after which any remaining funds are distributed to a charitable beneficiary. You can choose from two types of CRTs: Charitable remainder annuity trusts (CRATs) and Charitable remainder unitrusts (CRUTs).
Charitable lead trust (CLT): This type of irrevocable trust is essentially the inverse of a charitable remainder trust. The donor makes contributions, taking any potential income tax deductions. The funds, the “lead payments,” are then distributed to a charity or charities over a defined amount of time. The remaining assets are distributed to the beneficiaries once the trust term ends. When setting up your charitable lead trust, you can establish either a grantor or non-grantor CLT.
What Are the Key Benefits?
Tax Deductions
Setting up a charitable trust can be a great way to give to your favorite charity while reducing your tax liability. However, your tax obligations will vary depending on your trust type. With a charitable remainder trust, grantors may qualify for immediate tax deductions when they make contributions. CRTs are also tax-exempt, meaning any appreciated assets are exempt from the capital gains tax. Note: Beneficiaries still have to pay income tax on the payments they receive.
Charitable lead trusts, conversely, are not tax-exempt, but they can still be helpful tools for lowering your and your beneficiaries’ tax burden. Grantor CLTs may be eligible for immediate income tax deductions. With a non-grantor CLT, the grantor cannot take income tax deductions, but contributions can qualify for gift tax reductions. Additionally, assets are removed from the grantor’s estate, helping to minimize further the transfer taxes your beneficiaries may owe upon inheritance.
Control & Flexibility
Charitable trusts help ensure your assets are handled according to your giving, financial, and personal wishes. If your priority is lowering your taxable estate and building a legacy to pass on to your loved ones, a CLT may better fit your needs. For those hoping to provide income for their beneficiaries while lowering taxes on appreciated assets, a CRT may be the right option.
Additionally, while all charitable trusts are irrevocable, they can offer flexibility when you initially set the trust’s terms. For added control, many individuals combine their charitable trust with a donor-advised fund (DAF), which allows them to adjust their chosen charitable beneficiaries more easily.
Greater Impact
Charitable trusts are an excellent strategy for philanthropic individuals who want to do good while maximizing their legacy. Thanks to the numerous tax advantages, you can make significant donations to the charitable organizations you care about while boosting the money you have to support yourself or your loved ones.
Which Charitable Trust Should You Choose?
Because charitable trusts are irrevocable, selecting the trust type and terms that best align with your goals and wishes is crucial. Our qualified financial advisors can help guide you through the process, so you can maximize your charitable giving while minimizing your tax burden. Connect with us to learn more about how our personalized approach to financial planning keeps your charitable and financial goals aligned.
